UK life insurers could reduce their use of funded reinsurance after the Prudential Regulation Authority proposed a much higher capital charge. The regulator wants insurers to hold about 10% of the value of underlying annuity liabilities against the average funded reinsurance transaction, up from the current 2% to 4%.
The PRA announced the plan on April 29 after warning earlier this year that new rules were needed to prevent excessive use.
The proposal surprised parts of the market because some advisers had expected a smaller increase, S&P says.
Michael Abramson, partner and risk transfer specialist at Hymans Robertson, said the scale of the charge caused visible surprise among attendees at a speech by Gareth Truran, the PRA’s executive director of insurance supervision. Abramson said it is still too early to know whether appetite for funded reinsurance will fall away, but he described that as a possible outcome.
Funded reinsurance, also known as asset-intensive reinsurance, lets insurers transfer asset and liability risks from annuity business to a reinsurer. These reinsurers are often based in offshore financial centres such as Bermuda.
In the UK, life insurers mainly use the product in the pension risk transfer market. It helps them increase deal capacity, sharpen pricing, and gain exposure to assets they might otherwise struggle to access.
The PRA said about 15% of new UK bulk purchase annuity business has been ceded to reinsurers through funded reinsurance in recent years. The product combines longevity reinsurance with a funding component, where the reinsurer invests in a pool of assets and uses proceeds to meet obligations to the insurer.
The regulator is concerned that the funding element receives too light a capital charge under the UK insurance solvency regime. In the PRA’s view, that undervalues the risks and encourages overuse.
The new charge is not expected to end funded reinsurance entirely. Gavin Smith, principal in Lane Clark & Peacock’s pensions actuarial and risk transfer teams, said the proposal does not go that far, but it will materially change insurer behaviour.
Smith said insurers will use less funded reinsurance than before. He also expects the new rules to push insurers toward reinsurers with stronger financial strength ratings.
Funded reinsurance use differs sharply between companies.
Legal & General, the largest UK PRT writer in 2025 by deal value in Hymans Robertson data, ceded £2.2 bn, or 18.6%, of its £11.8 bn global pension risk transfer business to funded reinsurers in 2025.
Of that total, £10.4 bn related to UK PRT business. Rothesay Life, the third-largest UK PRT writer in 2025, used no funded reinsurance.
Usage also varies by year. Legal & General ceded 4.9% of its global PRT business to funded reinsurers in 2024, compared with 23.4% in 2023.
Several reinsurers provide funded reinsurance to UK PRT writers. Bermuda-based Resolution Life, through Resolution Re, announced its third funded reinsurance transaction for a UK PRT company in October 2024 after entering the market a year earlier.
InEvo Re, a Bermuda-based reinsurer ultimately owned by Macquarie, announced its second UK funded reinsurance transaction in December 2025. Its first deal came in March of the same year.
The PRA does not view current UK life insurer exposure as a problem. Still, it warned that exposure could rise from £40 bn now to £110 bn over the next decade if the current 15% cession rate continues.
The regulator plans to impose the change through the counterparty default adjustment. That calculation reduces the expected recovery from a reinsurer to reflect potential losses if the reinsurer defaults.
For funded reinsurance, the PRA proposes to base the calculation on the funded reinsurer’s financial strength rating and the assets backing payments to the insurer.
The regulator has dropped an earlier idea to value the longevity reinsurance and asset portions separately on an insurer’s balance sheet.
Smith said transactions with single-A, and especially A-minus, funded reinsurers could become difficult. Deals with double-A reinsurers may remain viable because their capital charge would sit below the PRA’s average 10% estimate.
Insurers could also lower the capital requirement by changing the assets backing the transactions. One option would be to improve the credit quality of the asset pool.
Those changes would raise the cost of funded reinsurance. Abramson said the size and credit quality of assets inside any reinsurance structure affect the overall price.
The proposals could reduce reinsurer appetite as well. Fitch said some reinsurers might seek access through direct acquisitions or partnerships with existing PRT insurers instead of funded reinsurance deals.
Abramson said reinsurers may push back during the consultation process. They have a commercial interest in keeping funded reinsurance capital efficient for insurers.
S&P Global Market Intelligence contacted several UK PRT writers and funded reinsurance providers. All declined to comment.
